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Vice President Joe Biden announced the release of the Department of Labor's (DOL’s) long-awaited final rule increasing the salary threshold for overtime exemption to $913 per week, or an annual salary of $47,476, on May 18. Making the announcement at an ice cream plant in Ohio, a battleground state in the presidential election, Biden said, “The rules we’re putting in place today will benefit workers.”

However, for many small businesses, institutions of higher education and nonprofit organizations, the new overtime requirements present a difficult challenge. Rather than provide employees with increased pay, many businesses may opt instead to reclassify employees as nonexempt and restrict their work hours to no more than 40 per week.

What the New Rule Requires

Beginning Dec. 1, the standard salary level for exempt workers will increase from the current $455 per week to $913. The change also increases the exempt salary threshold for highly compensated employees from $100,000 to $134,004 per year.

FLSA Overtime Rule Compliance

For more overtime compliance news, tips and tools, check out the SHRM resources provided below:

The newly released regulations do not include any change to the standard duties tests for executive, administrative and professional employees. However, the salary threshold will be automatically adjusted every three years to remain at the 40th percentile of weekly earnings as measured in the lowest wage census region (currently the South).

Tammy McCutchen, the DOL's Wage and Hour Division administrator under President George W. Bush and an attorney at Littler in Washington, D.C., acknowledged that the DOL had reacted to some of the concerns of the business community by delaying the effective date of the new rule, but said, “The salary level is still too high.” She said that the original purpose of the overtime salary threshold exemption was to exclude obviously nonexempt employees from the overtime requirements. Now, “many employees who clearly meet the duties tests will be included instead.

McCutchen noted that the biggest impact of the changes in the minimum salary will be felt in small businesses and nonprofit organizations. “Small businesses cannot afford to increase salaries necessary to maintain the exemption, but also cannot afford to pay overtime—especially when this new regulatory burden is piled on top of Affordable Care Act obligations, state minimum wage increases and state paid leave requirements.” She added, “The options for small businesses are few: cut employees, cut work hours. They do not have excess profits to cover the increased costs.”

She also expressed concern that the changes small businesses would be required to make would not be popular with the affected employees. “They’ll be reclassified, which exempt employees will view as a demotion, and will have less flexibility in their work hours.”

Higher Education and Nonprofit Organizations

Although there had been rumors of a possible carve-out in the new rule for higher education institutions, no such exception was included in the final rule. Aitken said that despite claims by the DOL that teachers and employees at nonprofit organizations would not be impacted, there are “no changes in the rule that provide relief for higher education and nonprofits.”

According to guidance issued by the DOL, “bona fide” teachers will continue to be exempt, as they currently are. Graduate students acting as teachers or research assistants working under a professor also are exempt, as their positions are considered “educational.” But other employees who do not meet the requirements for educational exemptions, such as certain administrators and assistants, will be covered under the new guidelines.

The increase in salaries and wages for nonprofits with government contracts that require them to provide services at a set cost could put them “between a rock and a hard place,” according to a statement by David L. Thompson, vice president for public policy at the National Council of Nonprofits. While many organizations would like to pay their employees more, Thompson said, they also “worry about staying in business.”

Automatic Increase Criticized

Although the DOL changed the automatic annual threshold increases in the proposed rule to every three years in the final rule, “In a few short years, seeing a salary threshold above $50,000 will be a reality,” said Michael Aitken, vice president of government affairs at the Society for Human Resource Management.

McCutchen also criticized the automatic increases, noting that “all the workers currently in the wage gap covered by the new rule—those making between $23,660 and $47,476—will not be in the data set the next time the 40 percent salary threshold is reset. So that 40 percent level will get higher and higher.”

Business Associations React

The White House stated that the new rule will extend overtime protections to 4.2 million employees not currently eligible under the Fair Labor Standards Act (FLSA) and is expected to increase those workers’ wages by $12 billion over the next 10 years. However, many small business associations disagree that this is what will actually happen. “These rules are a career killer,” said David French, senior vice president for government relations at the National Retail Federation.

“These regulations are full of false promises,” said French. “Most of the people impacted by this change will not see any additional pay. Instead, this sudden and extraordinary increase will mean more red tape and fewer advancement opportunities for salaried professionals.”

Rob Nichols, president and CEO of the American Bankers Association, said, “If this rule was supposed to help workers, it misses the mark.” In a press release, Nichols stated that the rule “will be harmful to bank employees and the banks who employ them, and, as usual, smaller banks will be hit the hardest. As it stands, throngs of employees across the country, especially those at small banks and branches where a handful of employees wear many hats, will face reduced opportunity and flexibility in the workplace.”

Unions Disagree

Although businesses generally are opposed to the new rule, many unions applaud what they call a long-overdue update. In an op-ed written for the political website The Hill, United Food and Commercial Workers International Union President Marc Perrone noted that the current overtime exemption threshold of $23,660 is lower than the federal poverty level for a family of four.

“Under the new regulation,” he wrote, “some workers will no longer be required to work long hours for no pay, and that means they can spend more time at home with their families or they can get paid for the work they do. Others will get a pay increase in the form of time-and-a-half pay for overtime work. As to be expected, some workers will get a salary bump to exceed the new threshold.”

Michael Messina, assistant director of research and collective bargaining services at the American Federation of State, County and Municipal Employees (AFSCME), was optimistic that the “increased salary threshold will act like a bright line as to who is authentically exempt from overtime.” Messina added, “Because until today, the salary level was too low and employers could pay a lower salary and depend on the ambiguity of the duties test as to whether an employee was truly exempt.”

The new rule will have an immediate positive effect for many of AFSCME’s members, according to Messina. “Since many of [AFSCME’s] collective bargaining agreements say that the employer will follow the FLSA, the increase will benefit a lot of our members who are administrators and were classified as exempt.”